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Insurance

By Bernard K. Quinlan

Worker’s Compensation Experience Rating May Disqualify You from Projects!

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Massachusetts employer whose workers’ compensation premium averages $5,500 annually is subject to two experience rating factors: experience modification and all risk adjustment program (ARAP). These actuarially calculated factors are benchmarks that measure a contractor’s loss history against the experience of other contractors engaged in the same trade(s) and operating in the same state(s). Contractors with better than average experience earn a premium credit, while contractors with worse than average loss history incur a premium penalty. A favorable experience modification indicates that the contractor strives to provide a safe work site.

incurred losses during the experience period, and a 20 percent additional premium is charged by the insurer.

Experience Modification The experience modification is based on a firm’s payroll and losses during a three-year experience period. The experience period does not include the most recent policy period. For example, if an employer’s policy anniversary date is Jan. 1, the experience modification effective Jan. 1, 2011, is based on payroll and losses for the 2009, 2008 and 2007 policies. Thus, a claim that occurred in December 2010 does not affect an employer’s premium on Jan. 1, 2011. The experience modification calculation is more negatively impacted by claim frequency than severity. In fact, claims exceeding $5,000 in value are limited, and only a portion of the actual claim is included in the calculation of the experience modification. The claim data includes paid amounts for both ongoing and closed claims, and reserves for future payments expected on active claims. A 1.00 experience modification is average, and has no impact on a contractor’s premium. A .92 experience modification indicates that the contractor’s loss experience is better than average, and results in an 8 percent premium credit. A 1.20 experience modification indicates that the contractor has

Impacts on a Subcontractor’s Ability to Secure Work A debit experience modification and/or ARAP surcharge will negatively impact a contractor’s ability to be price-competitive. Additionally, general contractors and owners sometimes use experience ratings as a bid qualification! General contractors may exclude subcontractors whose experience modification exceeds some arbitrary benchmark (i.e. 1.00 or 1.10). Given the choice between a subcontractor who demonstrates better than average loss history, and a subcontractor who has earned a debit (greater than 1.00) experience modification, the GC may elect to go with the “safer” subcontractor.

Bernie Quinlan, CPCU, CIC, CRM, is a principal with Sullivan Group in Needham. He can be reached at (781) 5141331 or bquinlan@sullivangroup.com.

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First Quarter 2011

ARAP ARAP is calculated in conjunction with an employer’s experience modification and applies only on a surcharge basis. ARAP penalizes claim severity, as opposed to frequency. An ARAP surcharge can range from 1.01 to 1.25 maximum and may compound the impact of the experience modification. That is, a 1.20 experience modification combined with a 1.25 ARAP surcharge results in a 50 percent premium increase (1.20 x 1.25 = 1.50).

What to Do? First and foremost, prevent accidents from happening! Work with your insurance company loss prevention representatives, as well as your own project managers and foremen to provide the safest possible workplace. Work with your insurer and agent to manage claims that do occur. Do not assume that claims are being handled in the most efficient manner. Appropriate medical care with the goal of returning an injured employee to work, even on modified duty, will mitigate the impact of claims on the experience modification and ARAP. Do not assume that the experience rating calculations are calculated correctly! There are many

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